WTF Chart Of The Week

Authored by Jeffrey Snider via Alhambra Investment Partners,

Back in early October, I noted that repo fails had jumped above $250 billion (combined “to receive” and “to deliver”) for three weeks straight. That wasn’t an auspicious result, as sustained collateral problems like that don’t correlate to happy things. It all began the week of September 5, in what seemed like a minor one-day nuisance over the 4-week bill yield.

October was something of lull in repo and other things, too. Nothing ever goes in a straight line, of course, so it wasn’t surprising to find by mid-November a resumption of concerns based so much in repo. The week of Thanksgiving, fails totaled again more than $400 billion, similar in scale to that week of September 5. Then they spiked by 50% more to $600 billion the week after.

FRBNY records $523 billion in repo fails now for the first week of December. That’s three straight more than $400 billion, two in a row better than half a trillion.

The 8-week average is even just shy of $350 billion. You can get rich being a collateral owner under these terms, raising the question where are they all?

While these are good charts, important charts, neither is our Chart of the Week. What we are looking for in this context of really another burgeoning “dollar shortage” episode is, as always, escalation.

I’m going to go out on a limb and claim there is something seriously wrong in repo.


All jokes aside, I know it sounds like a broken record but the dimension that matters is not intermittent collateral problems so much as the greater intensity to them and in a condensing timeframe. Escalation is a description you really don’t want to fit the circumstances.

Just as raging wildfires have a horrific tendency to jump fire-lines and even whole valleys given enough energy, funding issues can jump markets. The global “dollar” market is not a monolithic whole and never has been. It may be (very likely is) more fragmented today than at any point in the past owing to persistent balance sheet capacity problems (therefore the breakdown of covered interest parity that used to keep various funding markets working together in what sure seemed like a seamless whole). It would be a clear point of magnification, then, to find serious problems in one part of the eurodollar system spilling over into another one.

Leading us to our Chart of the Week:

The 3-month €/$ cross currency basis swap has plunged this week, a descent that really started the week after Thanksgiving. It has reached a level today last seen during the 2011 crisis. And this latest detour clearly marks its inflection where else but the week of September 5. In other words, you rarely find an exact match like the one we have here repo to €/$ swaps.

This particular instrument isn’t alone among XCurrBasisSwaps, either, it is merely the tenor and counterpart currency that right now is at the most extreme.

Because these are two very different funding mechanisms, repo and FX (Footnote dollars), there can be little doubt what is really at issue – “dollar” shortage as a matter of supply and therefore balance sheet capacity.

That’s the one common element linking collateral flow with the severe unwillingness (broken covered interest parity) to make a killing lending FX dollars to euro counterparties.


This doesn’t mean there is a crash right ahead. It does, however, suggest coming difficulties in various markets and more than that the global economy.

You can blame regulations all you want, as the mainstream has already rushed to do, being forced by such a huge move in €/$ cross to at least report on it, but there is no way this comes out as anything other than an escalating warning.

As a reminder, what negative premiums on XCurrBasisSwaps mean:

The cross currency basis swap is somewhat unique in that by fixing exchange values at both the outset and back end, it reveals purely financial perceptions in its values and changing values about the differences in interest payments. For example, in the 1990’s the basis swap for Japanese banks (again, not companies) was structurally negative, meaning that they had to pay a premium to swap into dollar funding because of negative perceptions of creditworthiness. This is the legacy of the downside of the “global dollar short”, as Japanese banks had accumulated large dollar asset positions (long US$ assets, short US$ funding) leaving them susceptible to such vagaries in dollar funding, whether repo or basis swaps or anything else someone on Wall Street or in London might dream up that wasn’t gold or actual cash…


The negative yen basis swap acts like leverage where even yields on the interim “investment” are negative. Any speculator or bank with spare “dollars” could lend them in a yen basis swap meaning an exchange into yen. Because you end up with yen you are forced into some really bad investment choices such as slightly negative 5-year government bonds, but that is just part of the cost of keeping risk on your yen side low. Instead, the real money is made in the basis swap itself since it now trades so highly negative. The very fact of that basis swap spread means a huge premium on spare dollars; which is another way of saying there is a “dollar” shortage.


Because of the shortage and its premium, you can swap into yen and invest in negative yielding JGB’s in size and still make out handsomely. There has been, in fact, a rush of foreign “money” into Japan to take advantage of this dollar shortage; the fact that there has been such enthusiasm and it still has not alleviated the imbalance proves scale and intractability.


b-sugar Sat, 12/16/2017 - 16:50 Permalink

Here we go again, government in the "triad" have choosen to kill their money to kill debt, bonds are dead, PER in stocks don't matter anymore. oh wow, the last 4years now make sense. i know

b-sugar Billy the Poet Sat, 12/16/2017 - 17:38 Permalink

A real TLDR? Dollar is dead. Triad agrees debt is no good, you have two options to resolve. kill your money (EU, US; create Euro to kill it or sacrifice Dollar (PetroDollar)) or accept degrowth (japan; spending every cent buying their own debt because you can't owe to yourself). start here for some really wtf charts;…  (germany 10Y was at -0,03 a few months ago, meaning the future of germany is more certain than the present... reflect on that for a second)  

In reply to by Billy the Poet

tion Blano Sat, 12/16/2017 - 22:31 Permalink

The comments section includes a link to DTCC's UST failure data. DTCC is the lovely tentacle that holds ownership of almost all of the publicly traded US stocks, including the ones that you 'bought'.

Are there consequences for a failure to deliver?Yes. Not only does the original trade fail, but the party that bought the securities may have already pledged them in a subsequent trade, and now that trade too will involve a failure-to-deliver, thus creating a cascading effect.

JMO anyone who believe that the unknown quadrillions of global derivatives can actually unravel in a 'zero-sum' fashion and not entail massive bailouts/failures is cray cray.  Not saying this will definitely happen, maybe something else unravels first (who really knows?), but it could be quite the doozy.  Seems like this (and DTCC records entailing the enormity of the hubris) could become a contender for being 'wiped' Building 7 style to avoid inconvenient scrutiny at some point, or maybe 'oops, your stock claim records got aloha snackbarred, sorry about your luck, no reefunds'. 

Are there penalties for a fail?To encourage prompt delivery of securities, Fixed Income Clearing Corporation (FICC) follows the recommendation of the Treasury Market Practices Group, which is made up of executives from the securities industry. Based on the group’s recommendation, FICC now collects interest at an annual rate of 3% on the settlement value of the trade (minus the Target Fed funds rate in effect the day before the settlement day).Can you give an example?Let’s assume that a firm fails on a $50 million position on which it is owed $50.1 million. If the Target Fed funds rate the previous day was 1%, then the fails charge will be 2% per year and it will be applied to the $50.1 million total value of the trade. This will result in a charge for the firm of $2,783.33 for that day.


In reply to by Blano

CPL Blano Sat, 12/16/2017 - 18:21 Permalink

It's like paying off a fully loaded visa with a nearly fully loaded master card then paying off that card off with an amex that's fully loaded.  Checks are bouncing like rubber balls.  Just means they'll print more money to save themselves since the repo trade handles the option chains and other derivatives.

In reply to by Blano

hooligan2009 Sat, 12/16/2017 - 17:08 Permalink

each basis point overnight on 100 billion dollars equivalent is worth around 28,000 bucks.a basis point on 500 billion is worth 140,000 bucks.there are 25 odd glpbal TBTF banks particiipating in box trading basis points across major currency pairs - that's a risk of under 6,000 bucks per basis point.even if it's just 3 banks, they could keep this shit up for weeks without it even registering with their complaince departments amidst the standard basis trading in IRS, CDS (and BTC).of course if this is being used to hide a funding crisis at one (out of those 3) TBTF global banks (C/DB/ICBC?) it means we are about ot have another Lehman.

Yen Cross Sat, 12/16/2017 - 17:24 Permalink

  This article is poorly written, I don't know where to begin. First of all currency swaps are based on time vs price. The whole reason swaps exist is so that central banks can borrow from each-other at a SET rate to be settled at a future date, for the same exchange rate. [ otherwise, what would be the point of swaps agreements] What the author I think is trying to explain, is the seconday market that has risk exposure to swaps, and therefor prices in some sort of fluctuation formula.  To say purchasing JGB's for the yield differential on the currency swap of yen/$usd back into $usd is totally fucking idiotic, and ignores the whole underlying reason why the disparity exists in the first place. Furtermore, any profits would likely be negated bcause the gains were nominal, and NOT real.

buzzsaw99 Yen Cross Sat, 12/16/2017 - 18:06 Permalink

the author switched gears so fast it gave me whiplash.  your last paragraph makes perfect sense, now.  however, i think when the author switched from talking about euro swaps to yen swaps he was talking about yen swaps back in the turbulent 1990s as an example.  i could be reading it wrong though.

In reply to by Yen Cross

Yen Cross buzzsaw99 Sat, 12/16/2017 - 18:43 Permalink

  The author was actually a shill for HSBC, Squid, Barclays, JPM, Douchebank research facility, and is trolling for their sideways F/X desks.  It's a race to the bottom of the F/X swamp, and currency swaps aren't the reason why.  The desperation at EOY is pathetic with these "Bingo Parlor" whores.  There's NO shortage of $usd. The banksters just don't know how to covert ALL of them back into their currencies, without writing down NOMINAL gains.

In reply to by buzzsaw99

SybilDefense buzzsaw99 Sat, 12/16/2017 - 19:03 Permalink

I thought he was talking about cars.  When he said having the asset allows you to make a killing I was thinking about immediately going out and buying a new roadster and maybe a new Jeep JL.  It sounded to me that the repos were down so I could not pay the notes and keep the assets.  A killing indeed.Imagine my distain when I realized I knew nor cared to know anything about the authors post.  Just checking in to see when my AG stocks should rebound.  Soundedlike "soon" but icouldnt say for   real.             Golly gee

In reply to by buzzsaw99

Snaffew Sat, 12/16/2017 - 17:42 Permalink

selling the house to buy btc and FANG seems like a good time to get in.  (sarc)   I will probably watch all these outfits trade into the stratosphere in the final melt up and realize it would have been a great trade after all---

PotusNextus Sat, 12/16/2017 - 18:00 Permalink

just means someone is holding on to some specials with good enough yield worth it to pay the minimal damage of fails...or a little corner is in process and fed hasn't done anything about it....repo  fails has nothing to do with this other crap. just means its worth it to hold on to bonds one has over fail costs. plus fails usually turn into extensions of the failed trade. so dragging U.S. Bond repo's into the other stuff in this article is up ICAP's inner market repo desk and ask them who is screwing around (they won't tell you)when the daisy chains get too long the the fed will issue a reprimand threat and it will go year end maybe some people want some U.S. Credit Grade Bonds on the books?

bshirley1968 Sat, 12/16/2017 - 22:09 Permalink

Dollar shortage?   Think it has anything to do with total crypto market cap being $575 billion right now?  That's $125 billion more than this time last week.I see nothing slowing it down and no reason to cash out.  Trillions of worthless dollars looking for value and yield.  

ElTerco Sat, 12/16/2017 - 19:48 Permalink

It's not a dollar shortage, it's an uncollateralized debt abundance, to the tune of $600 Billion at the moment. Have fun with those money market accounts when the sins of leverage come to roost.

Nomad Trader Sat, 12/16/2017 - 19:42 Permalink

Here's what I think is happening, and please correct me if I'm wrong. Every smart person on the planet knows that official inflation figures are faked and USTs are overpriced. As such they are betting on lower prices using two methods: 1. Selling futures - as evidenced by the massive net short by non-commercials in the COT report; and 2. By shorting actual USTs which have been borrowed via repo.However unlike futures, which can simply be rolled, the UST shorts are having trouble maintaining the borrow i.e. borrow rates have skyrocketed, and it turns out that it's cheaper not to renew borrow but instead simply keep the USTs and pay a fails charge.Note: When the fails data came out back in September I shorted long bonds and that trade was immediately profitable (until just a few days ago). So it seems to me that a blowout in fails is correlated to the top of the bond market.The things I don't understand are:1. Why does the OP refer to this as a dollar shortage instead of a UST shortage? Surely the refusal to lend USTs at a fair rate combined with the refusal by the borrowers to give them back suggests a shortage of USTs not dollars.2. ‎Since everything about the current financial world screams, "Short the bond market!" and my views are repeatedly reinforced by long time highly successful financiers/traders/hedge fund managers, who exactly is on the other side of this trade? (besides the young kids who've never known anything other than BTFD). Is it really just CBs?3. ‎If the CBs really are driving this short squeeze, and are intent on killing all of us who hold the trade, how come they don't just enforce a significant penalty for non delivery? Because they can't? Because it's the banks who define the penalty and they're short USTs too?4. Could a continued elevation of fails be equivalent to a broad "Fu*k you, I'm staying short!" that catalysis a bond market meltdown? 

buzzsaw99 Nomad Trader Sat, 12/16/2017 - 21:33 Permalink

i don't get the feeling that this has anything to do with treasury shorts but rather with leverage, leverage, and more leverage.  the chinese borrow from twelve different banks against the same pile of steel.  the sauds buy shares in some pos company and then immediately pledge them as loan collateral so they can make more plays.  something like that may be happening in the fx carry arena where the same bills are pledged on margin six ways to sunday.  the banks don't raise hell because they collect interest on those loans along with other schemes.  and yen is probably right, they can't clear those trades to cash in on paper gains because the liquidity isn't there at current wish prices.

In reply to by Nomad Trader